Standing Committee D

[John Bercow in the Chair]

Clause 260

Particulars of secretaries to be registered: individuals

James Brokenshire: I beg to move amendment No. 198, in clause 260, page 120,line 26, leave out ‘instead of’ and insert ‘in addition to’.

John Bercow: With this it will be convenient to discuss the following amendments: No. 199, in clause 260, page 120, line 27, leave out
‘or in addition to either or both of them'.
No. 200, in clause 260, page 120, line 38, leave out ‘18’ and insert ‘16’.
No. 201, in clause 260, page 120, line 40, leave out sub-paragraph (ii).

James Brokenshire: The clause relates to the particulars of secretaries that are to be registered, and amendments Nos. 198 and 199 are largely probing amendments designed to obtain clarification on the names to be provided to the registrar. Subsection (2) says that
“For the purposes of this section ‘name’ means a person’s Christian name (or other forename) and surname, except in that in the case of—
(a) a peer, or
(b) an individual usually known by a title,
the title may be stated instead of his Christian name (or other forename) and surname or in addition to either or both of them.”
My question is about certainty, more than anything else. If a title is used, should not it be provided in addition to the Christian name or surname, rather than instead of them? That would facilitate due diligence and checking of company secretaries to identify whether they were previously a company secretary or similar officer, and would permit that investigation still to be undertaken even if they had changed their name.
Amendment No. 200 concerns consistency. Under the proposals in the Bill, it is now possible to standardise registration of particulars for names that have not been used for 20 years. That is in subsection (4): if somebody has changed their name or if the name has been disused for 20 years, the previous details need not be provided on the register. However, my question is whether, for the purposes of checking and due diligence, a disused name should still be provided even though it may have been disused for 20 years. Obviously that is a significant period, but there may still be a need to check for bankruptcy orders or the like—matters that may be relevant in the context of good corporate governance.
I note that if a name is
“changed or disused before the person attained the age of 18”
the name need not be provided. Directors can now be appointed at the age of 16, and the amendment would harmonise the age at 16, for the sake of consistency. If, during the two years between the ages of 16 and 18, a person uses a name and is the director of a company that goes bust or suffers some other unfortunate occurrence, but can then disuse their name on reaching 18, that hardly provides for the good corporate governance and due diligence to which I have alluded in relation to the other amendments. My approach is one of transparency and good corporate governance and I am testing why the Bill has been drafted as it has.

Nick Palmer: I have just a short point on amendment No. 201. The hon. Gentleman suggested that it might be relevant if a person had committed some sort of fraud 20 years ago. Is it not the case that, in that situation, the period in which such offences could have been mentioned would have expired? We would know the person’s name but we would not know about minor financial offences that they had committed 25 years ago.

James Brokenshire: I think the hon. Gentleman alludes to the fact that there is a time limit after which offences effectively expire for employment purposes. It is a fair point, but when, for example, there is about to be a flotation or suchlike, questions are often asked as to whether a director or potential director of a listed company has committed any offence in the past. Clearly, in that greater public exposure environment, it would be damaging to a company if that information were to be provided at a later date, once a company was on the market. That is why those due diligence investigations are undertaken and why, in these probing amendments, I am attempting to see whether we will have sufficient clarity for those types of investigations after the introduction of the Bill.

Mike O'Brien: The hon. Gentleman pointed out that these were probing amendments. He made some sensible, arguable points. The approach that we have taken to the provision is largely to maintain the current situation. We could have gone for a different kind of consistency. At this stage, we thought that there was no need to change it.
The approach taken to both directors and secretaries in the early part of the clause is long-standing. It has not caused problems so we decided to leave it as it is. We feel that that is the better approach but do not feel particularly strongly about it.
As far as peers are concerned, this reflects the long-standing arrangements. The right hon. and learned Member for Devizes (Mr. Ancram) is an interesting example, if I may use his name for illustrative purposes. He comes within subsection (2)(b), because Ancram is a courtesy title. His title, as I understand it, is now Lothian. However, his family name has always been Kerr. Everyone knows him by a particular title, so no one would think it inappropriate for him to use the title by which he is commonly known. That approach is allowed for in subsection (2)(b). It would then be up to him as to which title he chose to be known by, providing that there was nothing misleading in the way in which it was done.
Amendments Nos. 200 and 201 relate to the requirements on former names. The Bill retains the requirement in the current Act only for former names back to the age of 18, rather than the lower age of 16 that applies to directors and authorised signatories.
Our view was that one could go for consistency either with the old Bill or with directors and authorised signatories. There is an argument for either. It is a matter of taking a choice. For secretaries of public companies, the qualification requirements in clause 256 mean that there is little need for a minimum age. I cannot imagine that many of the people achieving that qualification are likely to be 16, so it seems unnecessary to change the arrangements for the age and information about former names.
Section 290 of the Companies Act 1985 requires a former name for a secretary. In that it differs from the rule for directors in section 289 of excluding a former name that has been changed or disused for 20 years or more. We do not see any reason for applying a longer period to secretaries’ former names than to directors’.
Those are broadly the reasons. If the hon. Gentleman feels particularly strongly—I suspect that he does not—that the requirements need to be changed, we will be happy to consider that, but that is the approach we have taken.

James Brokenshire: I am grateful for the Solicitor-General’s comments. As I said in my opening remarks, these were largely probing amendments, to help us understand the basis on which these approaches had been developed.
The situation for company secretaries is at a less heightened level than that of directors, where there has traditionally been greater sensitivity about the information. Indeed, the information about company secretaries has been less full than the information provided by directors on the public record under section 288 of the 1985 Act. I take on board what the Solicitor-General said about the longstop of 20 years on former names and the approach taken on whether to specify an age of 18 or 16.
As the Solicitor-General helpfully pointed out, there is an issue of consistency on which we might reflect a little further. It is not likely that there will be huge numbers of directors aged 16 and 17, but in this increasingly entrepreneurial world in which young people are rightly encouraged to take a healthy interest in business and perhaps set up their own companies, this might become more important, so some further reflection on that point would be helpful as the Bill proceeds.

Mike O'Brien: I am grateful to the hon. Gentleman. We are certainly happy to reflect on the matter. If he has strong views on it, I am happy for him to come back to me.
I have reflected on another matter that the hon. Gentleman raised in our last sitting. He mentioned his concerns that people might seek to increase the fee to restrict access to the register of secretaries. I asked for some work to be done on the matter, and it seems that the fee is £2.50 for each hour during which the right of inspection is exercised. The making of that fee is enabled by the Companies (Inspection and Copying of Registers, Indices and Documents) Regulations 1991 and therefore set by the Secretary of State. If somebody wants to go along and have a look at a name it does not cost much, and there is no option to put up the price unnecessarily. That rule will be introduced through regulations and therefore promulgated by the Secretary of State. It would be useful if the registrar made clear the situation on the Companies House website.
I am happy to reflect on the point that the hon. Gentleman just raised, which is a matter of preference. I do not think that it will make much difference, because the work of company secretaries means that they are likely to have to comply with certain requirements. I doubt that they will be 16 years old, because of the nature of the work.

James Brokenshire: I am grateful for that further clarification, in particular on the point that we discussed about fees, which is helpful in terms of transparency. I am grateful also for the Solicitor-General’s comments on making the information more visibly accessible on the Companies House website. That would be helpful, so that everybody can be clear precisely what the situation is when exercising their rights and that they are not in any way fobbed off or given a false impression. On the basis of his comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 260 ordered to stand part of the Bill.

Clause 261 ordered to stand part of the Bill.

Clause 262

Particulars of secretaries to be registered: power to make regulations

Question proposed, That the clause stand part ofthe Bill.

James Brokenshire: I seek clarification on whether there is any intent to use the regulation-making power under the clause to add or remove items to be registered, or whether the provision is intended to cover reviews in the future if it is thought appropriate to add information or modify requirements to cover circumstances not currently contemplated.

Mike O'Brien: The aim is to ensure that we are in a position to make regulations should we be of a mind to. We have no intention of making these regulations, but it is appropriate to keep this clause in the Bill to enable us to review the provisions at some stage in the future, and keep them up to date.

Question put and agreed to.

Clause 262 ordered to stand part of the Bill.

Clause 263 ordered to stand part of the Bill.

Clause 264

Resolutions

James Brokenshire: I beg to move amendment No. 327, in clause 264, page 122, line 5, at end add
‘, save in the case of a public company not being a quoted company, which may pass a written resolution in accordance with Chapter 2 of this Part.’.

John Bercow: With this it will be convenient to discuss the following amendments: No. 328, in clause 266, page 122, line 36, after ‘company’, insert
‘or a public company not being a quoted company’.
No. 329, in clause 268, page 123, line 41, leave out ‘a private company’s articles’ and insert
‘the articles of the relevant company’.
No. 332, in clause 271, page 124, line 33, after ‘company’, insert
‘or a public company not being a quoted company’.
No. 333, in clause 271, page 125, line 8, leave out ‘private’ and insert ‘relevant’.
No. 334, in clause 272, page 125, line 16, leave out ‘private’ and insert ‘relevant’.

James Brokenshire: We now move on to part 13 of the Bill, which deals with the procedures for convening meetings and for passing resolutions. Clause 264 incorporates general provisions regarding the ways in which private limited companies and public companies are permitted to pass resolutions. The clause makes it clear that while private companies are permitted to pass resolutions of shareholders by means of either general meetings of shareholders or through the mechanism of written resolution, public companies are not. The distinction reflects the approach taken in section 381A of the Companies Act 1985.
While this approach provides a clear dividing line between companies that are permitted to use the written resolution route and those that are not,the purpose of the amendment is to question whether the written resolution route could have wider application beyond private limited companies. This is particularly so as a number of public companies may have a small number of shareholders who are not listed. It would therefore seem more practical andless bureaucratic to extend the written resolution mechanism for these types of companies. I acknowledge that quoted plcs are likely to have a considerable number of shareholders. It may not be practicable, even if they wished to do so, for them to adopt the written resolution approach, certainly in a timely fashion. The general meeting approach may well be more appropriate to them.
From a public company perspective, and in order to ensure transparency, the ability for shareholders to attend a general meeting and to ask questions as appropriate is clearly important. I therefore understand the distinction drawn between the written resolution approach for private limited companies and the restriction to general meetings for public companies. However, it is worth examining that further in a deregulatory framework to see whether for non-quoted public companies the regime of written resolutions might be extended. Under the amendment, quoted public companies would still not have the option of using the written resolution approach while non-quoted public companies would. The amendment is intended to reflect the intent to promote more flexible and efficient decision making within the companies.
Amendments Nos. 328, 329, and 332 to 334 are consequential amendments to further clauses as a result of this proposed change.

Margaret Hodge: I understand the motivations behind the amendments, and it is true that the company law review recommended that public companies should be able to opt out of holding AGMs. However, the review was not clear about how such public companies were to take decisions. Its recommendations relating to written resolutions specifically concerned making it easier for private companies, so the focus was on think small first.
Our proposals are framed in the way that they are primarily because of EC regulations and EC law—specifically, the second company law directive, which requires a number of resolutions in relation to public companies and the maintenance and alteration of capital to be taken in general meetings. In addition, as for private companies, resolutions to remove a director or an auditor must be taken at general meetings. Some remaining resolutions could therefore be taken in other ways, but our view is that that would make things slightly more complex and difficult for companies to understand.
When we consulted on the company law review, in both the 2002 and the 2005 White Paper, it is fair to say that there was not much appetite for enabling public companies to opt out of holding AGMs. The general view was that meetings continue to serve a useful purpose for most public companies. For those reasons, we took the view that the written resolution procedure should continue, as under the 1985 Act, to be available for private companies only.
I hope that, in view of that explanation, the hon. Gentleman will feel able to withdraw the amendment.

James Brokenshire: I am grateful for the Minister’s comments, although they perhaps underline the debate that we had earlier in the week about the distinction between large and small, and how that is defined. The Department’s view is that the distinction is drawn between a public company and a private company. That is the dividing line that is adhered to, whereas we have advocated examining that rigid view more closely, to see whether it provides the think small first-type approach that the Minister mentioned. Hence my attempt in the amendments to distinguish a quoted company—a company whose shares are listed on a stock exchanges, for which the issues that the Minister highlighted, such as the need for meetings, transparency and the ability of shareholders to hold directors to account and ask questions, are proper and valid—from a non-quoted one.
I am disappointed that the Minister does not feel that there is sufficient appetite to examine the possibility of extending written resolutions to non-quoted plcs, with a smaller group of shareholders, or of such companies’ processes and procedures being adhered to more closely. However, in the circumstances, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 264 ordered to stand part of the Bill.

Clauses 265 and 266 ordered to stand part of the Bill.

Clause 267

Votes: general rules

James Brokenshire: I beg to move amendment No. 222, in clause 267, page 123, line 23, after ‘member’, insert
‘, whether voting in person or by proxy,’.

John Bercow: With this it will be convenient to discuss the following amendments: No. 223, in clause 267, page 123, line 25, after ‘member’, insert
‘,whether voting in person or by proxy,’.
No. 224, in clause 268, page 124, line 3, after ‘member’, insert
‘,whether voting in person or by proxy,’.

James Brokenshire: The clause makes general provisions in relation to the manner in which votes are to be conducted, in the context of a written resolution, a resolution on a show of hands at a general meeting of shareholders and a resolution taken on a poll at a meeting of shareholders.
Subsection (2) makes it clear that, on a vote on a show of hands at a general meeting, each member and validly appointed proxy present has one vote. However, subsection (3) states that, on a vote on a poll,
“every member has one vote.”
That wording could be construed as limiting the operation of subsection (3) to members only, rather than including proxies as well. I do not believe that that is the intention and I think it would be helpful to put this beyond doubt by stating that every member, whether voting in person or by proxy at a general meeting, has one vote in respect of each share or £10 of stock held. Amendments Nos. 223 and 224 would make consequential changes.

Margaret Hodge: The hon. Gentleman is right. Clause 267 sets out the general rules relating to votes and members. The specific requirements are set out in clause 268 and cannot be overridden by the articles. Our view is that the Opposition’s amendments make no improvement to the operation of these two clauses. I draw his attention to clause 307, which entitles a member to appoint one or more proxies to exercise the voting rights attached to a member’s shares. When a poll on the resolution is called it is the votes conferred by each share that are counted. At that point it is irrelevant whether the member is voting in person or by proxy and nothing is added to the provision by stating that explicitly in clauses 267 and 268. I hope that after that explanation the hon. Gentleman will feel able to withdraw the amendment.

James Brokenshire: The reason for tabling the amendments was to seek clarification that the phrase “every member” in clauses 267 and 268 is intended to mean every member voting in person or by proxy. In the light of the Minister’s confirmation of that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part ofthe Bill.

James Brokenshire: Subsection (2)(b) states that on a vote on a resolution on a show of hands at a meeting:
“every proxy present who has been duly appointed by a member entitled to vote on the resolution has one vote.”
Could the Minister confirm the intention behind this wording in the context of a member’s ability to appoint multiple proxies? Surely the intention should not be that a member is entitled to appoint more than one proxy, each of whom would be entitled to vote, as a member voting by proxy in these circumstances would have more votes than a member voting in person at the meeting, which cannot be right. I am sure that there is some explanation, as that is clearly not the intention behind the drafting.
Clause 268(2) makes specific provision in circumstances where the articles of association of the company seek to differentiate between the rights of members and the rights of proxies in a negative way. The language appears to apply only to clause 268(1). These are technical comments, but it would be helpful to have some clarification.

Margaret Hodge: This is complicated stuff. I am trying to come to grips with it. I hope that I can help the hon. Gentleman here. If there are multiple proxies attending a meeting where the voting is on a show of hands there is a common law duty on the chairman to demand a poll on a vote if he considers the outcome would be different from that reached by a show of hands. Many companies, particularly quoted companies, count all votes on a poll as a matter of practice, and an appropriate requirement is usually set out in their articles. Some companies still allow participants, whether members voting in person or by proxy, to demonstrate—I am not sure that this helps much—

James Brokenshire: Perhaps this is something for later on.

Margaret Hodge: Yes. The problem with votes on a show of hands is that members may appoint several proxies. I accept the point that the hon. Gentleman has made. The Bill deliberately facilitates that, because it is a mechanism for allowing pool nominees, of the kind we will discuss when we come to part 9, to give the underlying owners of shares the right to turn up to meetings. However, if the proxies between them have the same rights on a show of hands as the member, they should have one vote between them. Owing to the policy on underlying shareholders, we prefer the default position to be that proxies have one vote each on a show of hands. Consequently, we need to refer specifically to proxies in clause 267(2), because we are departing from the general rule. I accept that that is complex. Perhaps the quicker companies come to proper polls the easier life will get.

James Brokenshire: I am not sure that I necessarily did get the clarification that I was hoping for. I understood that the fundamental issue on multiple proxies and proxies having one vote was about what happens if a member appoints more than one proxy. I appreciate the flexibility arguments on that. For example, if a shareholder has 10 shares and can therefore appoint, say, 10 proxies, it would not be desirable for that person to have 10 votes on a show of hands when someone with 10 shares who attends in person would only have one vote. That was the approach that I want to deal with, because it is clearly not fair or appropriate and could lead to absurd situations.
I do not think that that is what the Minister was setting out. I take it that a member appointing proxies cannot effectively usurp their position and, by virtue of the mechanism in question, get more votes than they would have been entitled to had they turned up at the meeting, but that is what concerns me.

Margaret Hodge: The issue is complicated, which is why I said that we hope that more companies move to proper polling of their members. The problem relates to proxies for pool nominees, where there are multiple underlying interests. We want to reflect that, which is why a show of hands would be allowed in those circumstances. I accept that it is a difficult matter. I am advised that there could not be a challenge, but presumably if a member were unhappy in some way, the matter might presumably be subject to a challenge by the chairman.

James Brokenshire: I am grateful for that clarification. The question of pool nominees is a valid one, and we will debate in more detail how it is possible for nominee shareholders to gain their rights and enforce them effectively at a general meeting. That is a wider debate and I do not want to stray on to it now.
If there is a dispute, it is open to someone to seek a poll in the relevant circumstances to even out the situation, because voting would then be tied to the individual holding of shares. We need to keep the issue under review. I understand what the Minister said, and the complexities of always proceeding on a poll may not necessarily be desirable and may add cost. I think she is right about public companies. In essence, the information is provided because of the proxy information that comes from institutional shareholders who appoint the chairman as their proxy. It is possible, with reference to the number of shares, to see how many votes were cast for and against and how many abstentions there were. However, I am thinking about smaller or medium-sized companies that could fall between the two. However, I hear what the Minister says.

Jonathan Djanogly: In a general meeting, it is now best practice in corporate governance—I think it is also a combined code requirement—that the chairman reads out the proxy situation. Typically, that would be done after the show of hands. However, in circumstances where the vote might be tight or complicated, there is no reason why the chairman should not read out the proxy situation before the show of hands. In that case, members would have an idea which way the wind was blowing, so in practice I think the problem would sort itself out.

James Brokenshire: I concur with my hon. Friend’s comments, which relate to quoted companies. However, some of my comments concerned smaller companies, which could be opened up to a situation in which the provision is misused. That would not be so much of an issue for quoted companies. We might reflect on the clause, but in the light of comments made this morning, I shall not press the matter further.

Question put and agreed to.

Clause 267 ordered to stand part of the Bill.

Clause 268 ordered to stand part of the Bill.

Clause 269

Votes of joint holders of shares

Question put, That the clause stand part of the Bill.

James Brokenshire: The clause makes provision for joint holders of shares. In particular, it states:
“only the vote of the senior holder who votes (and any proxies duly authorised by him) may be counted by the company.”
Subsection (2) states:
“the senior holder...is determined by the order in which the names of the joint holders appear in the register”.
That could be read in two ways: first, that only the senior holder—the person named first in the register of members—is entitled to vote, or, secondly, that the vote of the most senior named shareholder who votes should be counted. In other words, if the first named person does not vote, but the second and third named ones do, the second named person takes priority. That is the understood way in which joint shareholdings have operated up until now, and it would be helpful if it could be confirmed that no change is contemplated.
On a separate matter, was any contemplation given to limiting the maximum number of joint holders who may hold a single share, as that requirement is commonly inserted into many companies’ articles of association? From my brief review of the draft model table A articles, inserted in the large bundle of documents that I received recently, it appears that it contains no such specific provision. Was any thought given to streamlining the approach or will companies still have to reserve on a case-by-case basis such a provision in their articles of association?

Margaret Hodge: We are not introducing any change, but simply putting on a statutory footing what was a default regulation under table A. There is no change on the issue of the senior holder. We did not look at limiting that. Our view was that limiting the number of joint holders of shares should be down to the companies themselves to put into their articles. They will be able to do that after the Bill is enacted.

Question put and agreed to.

Clause 269 ordered to stand part of the Bill.

Clause 270

Effect of provision in company’s articles as to admissibility of votes

James Brokenshire: I beg to move amendment No. 330, in clause 270, page 124, line 22, after ‘deemed', insert ‘not'.

John Bercow: With this it will be convenient to discuss amendment No. 331, in clause 270, page 124, line 22, leave out ‘if' and insert ‘notwithstanding that'.

James Brokenshire: The clause is an entirely new provision. It states that if a person is not entitled to vote on a resolution, but does so, and if the articles of association of that company provide a mechanism for objecting to an improper vote, and if an objection is made and rejected, or if no objection is made within the relevant time period, the unauthorised voter
“is deemed to have been entitled to vote”.
The explanatory notes state that the provision is intended to ensure that other provisions in the Bill do not interfere with
“the operation of provisions in the articles which impose a procedure for objecting to and determining the admissibility of a vote.”
Although that is true, the clause appears to go a stage further by stating that a person not entitled to vote
“is deemed to have been entitled to”
do so in such circumstances. Even if it could be shown that a chairman erred in law, was negligent, made a manifest error or was fraudulent, the clause seems to protect him. That is the sort of thing on which I am trying to glean clarification.
It is also unclear how statutory minority shareholder protection might operate in such situations because not only is the decision of the chairman treated as being upheld, but, from my reading of the clause, any errors are deemed to be corrected. How will the rights of minority and other shareholders who have a grievance about that decision be treated?
I recognise the need for certainty in the context of decisions taken at meetings and the need for that to be done efficiently, effectively and quickly, but it would be extraordinary if shareholders could be prejudiced without any apparent method of challenging a decision that is irrational, unreasonable or even unlawful. Amendments Nos. 330 and 331 seek to clarify the Government’s intention. If shareholders’ rights are undermined by the clause, the balance of convenience should be weighed in favour of shareholders whose rights might be prejudiced.

Margaret Hodge: The hon. Gentleman raises a difficult point and his amendment gave me cause for thought. The conflict is that we want to provide commercial certainty for the company. The ability constantly to question decisions taken after a meeting would undermine that commercial certainty. We also want to ensure that those who take decisions have a legitimate role and an appropriate locus. I am sure he agrees that, in the interests of the company, it is better that objections are dealt with at a meeting and that the chairman takes a view on whether people are entitled to vote so that the matter is settled there and then. If things go badly wrong, other remedies should be open to members if they feel that the chairman was in breach of his duties in public law. If they believe that they suffered unfair prejudice, they should be able to challenge that and the court has discretion to make a wide range of orders.
However, we think we have got it right. We may be able to tweak this at the edges. Perhaps the hon. Gentleman will allow us to consider his amendments and return to the matter on Report to ensure that we have the proper balance between certainty for members and ensuring that the right people vote at meetings.

James Brokenshire: I am grateful to the Minister for agreeing to reflect on the provision in greater detail. It is a sensitive issue and needs to be examined carefully. My fundamental concern is the need for commercial certainty and the desire to have things settled quickly and effectively by the chairman in accordance with the articles of association.
My concern relates to the latter point that the Minister highlighted on remedies that might be available to shareholders. The phrase:
“deemed to have been entitled to vote as he did”,
in subsection (2) gave me cause for thought, hence my amendments, and should not in any way invalidate or undermine the remedies that might otherwise lie open to a particular shareholder. If there is deemed to be prejudice, the company or directors could say, “Even if there was prejudice, on the face of it and by virtue of allowing someone to vote who should not have been allowed to vote, that is remedied and cured as a consequence of clause 270(2).”
In the light of the Minister’s agreement to reflect on those thoughts and to return to the matter on Report, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 270 ordered to stand part of the Bill.

Clause 271

Written resolutions of private companies

Question proposed, That the clause stand part ofthe Bill.

James Brokenshire: Clause 271(5) refers to the effectiveness of written resolutions, and states that
“references in enactments passed or made before this section comes into force...at which a resolution is passed or to members voting in favour of a resolution shall be construed accordingly.”
Although I recognise the use of the clause to allow shareholders in companies with articles of association predating the new Bill to have the benefit of its written resolution provisions, if a company had deliberately opted for meetings to approve resolutions, for whatever reason, what impact would the provision have in that context?
Clause 283 suggests that that cannot be done, but I would be grateful for the Minister’s confirmation, as it seems to me that a company, for whatever reason, might wish to entrench something in its articles to ensure that a general meeting is held, rather than relying on a written resolution provision. I would appreciate clarification and perhaps some thoughts about why that particular approach has been taken.

Margaret Hodge: I do not quite understand which point the hon. Gentleman is not clear about.

James Brokenshire: Clause 283 states:
“A provision of the articles of a private company is void in so far as it would have the effect that a resolution that is required by or otherwise provided for in an enactment could not be proposed and passed as a written resolution.”
I therefore take it that if the article said that something had to be passed at a general meeting, clause 283 would override it. I raise the matter in the context of clause 271 because it makes provision in respect of written resolutions of private companies. I want to be sure that my reading of the proposal is correct in terms of how clause 271(5) will apply to the moving of written resolutions and what protection might be afforded to companies in that respect. I hope the Minister can clarify the point.

Margaret Hodge: I hope that I can help the hon. Gentleman. We will look at clause 283 when we consider transition arrangements and we may wish to return to the matter then. Clause 271(5) applies only to enactments, so in relation to Acts, regulations and so on, existing articles are offered the transitional consideration. I am not sure that that deals with the point, but I hope it does.

James Brokenshire: I do not think it does. The Minister has already mentioned statutory provisions in relation to the removal of directors and auditors. My point is about what will happen if a company wants to entrench within its articles a particular issue—for example, the right to deal with something in a general meeting rather than a written resolution. Will it be entitled to do so in those circumstances?

Margaret Hodge: I shall stop listening to my officials and just try to understand what the hon. Gentleman is saying. I think the answer is yes.

James Brokenshire: In the light of the Minister’s confirmation, for which I am very grateful, I shall sit down.

Question put and agreed to.

Clause 271 ordered to stand part of the Bill.

Clause 272

Eligible members

Question proposed, That the clause stand part ofthe Bill.

James Brokenshire: During discussions in Grand Committee in the other place, there was a short debate on what is now clause 275 about the time of the circulation of notices and whether time should run from the distribution of the last of the written notices to shareholders or the first, when notification of written resolutions is sent out at different times.
A similar point arises in the context of this clause. In Grand Committee, Lord Sainsbury said that he would look at this matter again. I see that there are competing arguments, but I would be grateful if the Minister confirmed that the matter is settled.

Margaret Hodge: On this point I have a clear brief. We did look at the matter again and the answer is no, but I do not have a copy of what precisely Lord Sainsbury said.

James Brokenshire: I am grateful for that clarification.

Question put and agreed to.

Clause 272 ordered to stand part of the Bill.

Clause 273 ordered to stand part of the Bill.

Clause 274

Circulation of written resolutions proposed by directors

James Brokenshire: I beg to move amendmentNo. 335, in clause 274, page 126, line 9, leave out subsections (5) and (6).

John Bercow: With this it will be convenient to discuss the following amendments: No. 344, in clause 324, page 144, line 18, leave out subsections (3) and (4).
No. 347, in clause 340, page 152, line 4, leave out subsections (3) and (4).

James Brokenshire: We move on to clause 274, which deals with the circulation of written resolutions proposed by directors and, in particular, the sanctions and provisions that might apply in those circumstances. Subsection (7) refers clearly to what happens in the event of a defect:
“The validity of the resolution, if passed, is not affected by a failure to comply with this section.”
In other words, notwithstanding the defect and the fact that a shareholder has not been notified of the written resolutions, if a resolution is still passed by the appropriate majority, it will stand.
In many respects, we have in this subsection a codification of the errors and omissions-type provisions that have been common in the articles of association of companies up to now in respect of general meetings or general written resolutions to provide the certainty in the outcome of resolutions that we have discussed more generally today. However, there is a criminal sanction on directors for failure to comply, even though a minor issue, an error or an oversight might be involved and there was no deliberate intention to arrive at that situation.
It is interesting that in clause 270, which we have discussed in relation to the chairman’s role in determining the outcome of meetings, there is no specific sanction on the chairman if the chairman gets it wrong. I am highlighting a consistency argument.
Perhaps the other relevant provision to consider in that context is clause 296, which in some ways reflects a similar approach. It talks about
“accidental failure to give notice”
of a resolution or meeting, and says that such an accidental failure
“shall be disregarded for the purpose of determining whether notice of the meeting or the resolution...is duly given.”
In many ways, it reflects the approach of the written resolution route. However, there is no criminal sanction in that context, so that if there is a general meeting and failure to give notice to a shareholder, the resolution is ultimately still held to be valid, although there is no criminal sanction for failing to give notice. However, if there is a failure to give a copy of a written resolution to a shareholder, there is a criminal sanction. This is a question whether that is the right approach.

Jonathan Djanogly: My hon. Friend is making an important point. The fact of the matter is that if a written resolution is not circulated to one of 50 shareholders, it might simply be a mistake. These things happen in real life. On the other hand, it might be a serious attempt at fraud, and an effective one in terms of disrupting the business of the company. As things stand, the clause does not provide for that balance to be taken into account.

James Brokenshire: My hon. Friend makes the right point about fraud. In tabling the amendments, I was not in any way seeking to downplay the need for compliance and ensuring that shareholders receive proper notification in such circumstances. This is about genuine error.
Written resolutions, as we have discussed this morning, are limited to private companies, not public. However, it is still possible for private companies to have a considerable number of shareholders. In many respects, it is possible to have a private offering that is not on offer to the public and still gain a large number of shareholders.
In my experience, I have encountered private companies that surprisingly have 100 members. An administrative error might occur under such circumstances in relation to ensuring that all shareholders are given proper notification of meetings or written resolutions.
This is a matter of how to strike the right balance. Interestingly, in other contexts—for example, under the Financial Services and Markets Act 2000—there is the concept of a civil penalty, which is almost like a civil fine. With that sanction, it is possible to bring some financial penalty against a person for failing to comply with the regulation without giving them the criminal record that the clause refers to.
Amendment No. 344 makes a similar point in the context of disclosing the results of a poll under clause 324, and amendment No. 347 makes it about the records of decisions by a sole member for the purposes of clause 340. In that last case, it is difficult to see whom the provision is trying to protect, as the sole member is the person who has taken the decision and that decision can affect only his or her interests. It is therefore interesting to wonder who needs to be protected by the criminal sanctions.
How do we ensure compliance? How do we ensure that shareholders are properly protected, that there is no fraud and that companies are administered appropriately, effectively and in accordance with the law, without at the same time unduly penalising directors who make a genuine and minor mistake resulting in failure to notify?
I question whether the approach to written resolutions and notification of general meetings strikes the right balance. What factors underlie the Government’s decision to treat written resolutions differently from general meetings of shareholders?

Margaret Hodge: The hon. Gentleman has raised several issues. First, he mentioned the fact that whatever happens and whatever sanctions exist, the resolution remains valid if passed. That relates to the point that we discussed earlier: the company must have certainty to be able to pursue its business effectively and efficiently. That is why that part of clause 276 has been included.
The hon. Gentleman’s second issue was that our approach to sanctions is inconsistent. During debate on an earlier clause, we talked about the possibility of taking action if it is felt that the chairman has abused his powers in considering the company’s business and resolutions. Members can take action in that context. The chairman could be in breach of his duties under common law, or a member could claim to have suffered unfair prejudice. In such circumstances, the courts have a wide range of orders, so there is some consistency.
The hon. Gentleman’s third issue dealt with giving notice. I say to him simply that there is a sanction. It is a civil sanction, not a criminal sanction, and I accept the difference.
The Government’s view is that resolutions are particularly important because of their potential impact on how the company proceeds in running its affairs, and it is therefore right that there should be a tougher sanction for that. It would be slightly excessive to assume that simply failing to give a notice, which may or may not be deliberate, requires the same sort of criminal sanction to be attached to it.
The fourth issue that the hon. Gentleman raised was sole members, but of course if a resolution is not circulated to a sole member, it will not happen, so there is no need for us to cover that case.
Let me talk about the sanctions generally. This issue was discussed in the context of the work undertaken by the company law review, and the hon. Gentleman may have read the report arising from that. The review suggested that it was better to bring into the legal provision a clear, accessible and consistent approach. The CLR recommended that, in future, company law should as a general principle state clearly in relation to every rule what the consequences of a breach should be. When we reviewed the minor criminal offences used to enforce regulatory requirements in current law, the CLR concluded that those were justified by the cost-effectiveness achieved, compared with the relative inefficiency of any alternative approach.
In clauses 274, 324 and 340, we set out the consequences of failing to comply with the requirements of those clauses. We consider that the offences represent proportionate and effective sanctions and appropriate enforcement. I hope that, with that explanation and the response to the various issues that he raised, the hon. Gentleman will feel able to withdraw the amendment.

James Brokenshire: I am not happy with the Minister’s response on this issue. It is interesting that she drew a distinction between resolutions and notices and suggested that a default in relation to the provision of a notice was considered perhaps a slightly lesser issue than one in relation to providing a copy of the written resolution. That misses the point. The purpose of a notice to a shareholder is to inform them of a general meeting at which a resolution is to be passed. Therefore, if they do not receive such a notice, they will be unable to exercise their vote on the resolution and have their say. In the same way, if a shareholder does not receive a copy of the written resolution, they are unable to cast their vote on the resolution. They are two means of achieving exactly the same thing.
It is peculiar to draw a distinction between not supplying a notice of a general meeting and not receiving a copy of the written resolution, because the result is exactly the same for the shareholder. In both circumstances, the shareholder is denied their right to vote, whether by putting their squiggle on the bottom of a piece of paper, by physically attending a meeting, putting their hand up and voting, or by voting by proxy.
I do not accept that distinction. I do not see why one action is treated as a criminal offence, with everything that that entails, and the other is treated as a civil offence. I do not see the fundamental distinction drawn between the two. There should be broad equivalence. Either both should be criminal offences, or both should be subject to civil sanction. The fact that minority shareholder protection rights are available in relation to a breach of the notice provisions is fine, but we are still talking about a civil sanction, not a criminal sanction.
It is worth noting that directors and officers may seek to rely on third parties, whether they be solicitors, agents or registrars, in sending out notices of meetings or written resolutions. If there is a default in one case, the director is potentially criminally liable, but in the other case, they are not. Circumstances may be outside the control of the director. A minor error may occur. It therefore seems strange, to say the least, that the director should be criminally liable in one set of circumstances, but not the other. That is why I feel discomfort at the approach taken in the Bill.
In making those comments, however, I should re-emphasise that I in no way wish to indicate that there should not be compliance—there clearly should be. We have talked about a situation in which there might be fraud, and it is absolutely right that protections should be adopted. All that I am saying is that we need greater consistency in the treatment of the two routes for passing a resolution. They both have the same end result, and I am trying to test the inconsistency in their treatment through the amendment.

Margaret Hodge: If the hon. Gentleman looks at clause 296, he will see that it relates to a different set of circumstances. It talks about the
“Accidental failure to give notice of resolution or meeting”,
not the deliberate or fraudulent failure to which he alluded. If the failure is accidental, it is much more appropriate to have a civil, not a criminal remedy. I cannot remember whether the hon. Gentleman is a lawyer or an accountant, but let me simply give him the legal advice that I have received: there can be no equivalent civil remedy with written resolutions; otherwise, the mechanism does not work. That is the legal advice, and it is another reason for going down the route proposed in the Bill. The hon. Gentleman looks puzzled, but all I can say is that that is the legal advice I have received.

James Brokenshire: I am grateful to the Minister for that intervention, but as my furrowed brow suggested, I did not quite follow the legal argument. If she could write to me with that legal advice on the written resolution route, that would certainly help to provide clarification as to why that route has been adopted.
The Minister makes an interesting distinction in relation to clause 296. She says that it relates to
“Accidental failure to give notice of resolution or meeting”,
and that is perhaps the right way to address the issue. There might be an accidental failure to give a shareholder a written resolution notification, and it seems strange and inconsistent that such a provision could not be adopted for use with a written resolution approach. The Government seem to accept that a mistake could be made in one set of circumstances, but not in the circumstances that we are discussing.
It would be appropriate for the Minister to reflect on my comments, and I genuinely look forward to seeing the legal statements that she has received on the legal basis for the provisions. It would be helpful to reflect further because, although she might not be entirely persuaded now, this is a serious issue. A minor error could result in a director suffering a significant criminal penalty, and I find it strange that that is the intention.

Margaret Hodge: I will write to the hon. Gentleman and I look forward to his musings on the legal advice that the Government are getting. I certainly hope that that will give him some comfort that the provisions are correct. Otherwise, we can return to the issue on Report.

James Brokenshire: In response to the Minister’s comment that she will provide the legal advice, and in the context of what she so eloquently described as my musings—I hope that they were more substantive and cogent than mere musings—I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 274 ordered to stand part of the Bill.

Clause 275

Members’ power to require written circulation of written resolution

James Brokenshire: I beg to move amendment No. 336, in clause 275, page 126, line 28, at end insert
‘, provided that such statement is not defamatory of any person.'.

John Bercow: With this it will be convenient to discuss amendment No. 341, in clause 297, page 134, line 3, at end insert
‘provided that such statement is not defamatory of any person'.

James Brokenshire: The clause deals with the members’ power to require the circulation of a statement or written resolution, particularly the requirement in clause 275(3):
“Where the members require a company to circulate a resolution they may require the company to circulate with it a statement of not more than 1,000 words on the subject matter of the resolution.”
The amendments seek to probe the protection of the company. If the statements that the members seek to include in the 1,000-word document that goes out with the written resolution are defamatory, what happens?
If a member requires a company to circulate such a written resolution, that would suggest that something has gone wrong, that there has been some sort of breakdown within the company and some significant issue has arisen that necessitates the member insisting that the company of which they are a member circulates a written resolution. The mechanism is intended to provide for and to protect in that sort of circumstance, so that a shareholder or group of shareholders is able to require that the company is at least bound to consider a particular course of action.
Against that backdrop, the situation is likely to be tense and difficult. There are various allegations that may or may not be asserted in such circumstances to justify the fact that a written resolution is sought. Against that backdrop, it is important that the statements that are contained in any accompanying document are not defamatory. The company, in receiving those statements and circulating them to a wider audience, could be putting itself in a difficult legal position. By that method the company could be exposing itself to an action for defamation.
The amendments seek merely to clarify. I note that the Minister is flicking through the Bill at the moment—I know that there are certain provisions that allow court challenges and so on and so forth. However, in speaking to the amendments I am seeking to ensure that there is clarity in the Bill and that the company has the ability, where something clearly is defamatory, not to have to circulate the statement. It would clearly be damaging to the interests of the company as a whole if in doing so the company exposed itself to liability for defamation action from a third party, even if that was not something that the company itself was advocating. However, by publishing that defamatory statement the company itself would incur a liability. Therefore, the amendment would allow a company to reject a statement if it was defamatory.
Amendment No. 341 makes the same point about clause 297 and the ability of shareholders to require that the company circulate a statement in connection with a resolution proposed to be dealt with at a general meeting. It is the same point as in the circulation of notices, information and statements to shareholders more generally, whether they be in the context of the written resolution or of a resolution proposed to be taken at a general meeting.

Margaret Hodge: The hon. Gentleman is correct to say that the circumstances in which one might want to circulate such a statement are likely to be pretty tense and contentious. Equally, what we have to do is to balance the right of shareholders to put their point of view and to have that discussed in relation to particular resolutions at the meetings. That right is what we are trying to protect.
There is a problem with the company itself determining whether a resolution is defamatory. As the hon. Gentleman was speaking, I was thinking of the times that I have thought that the press has defamed me, only to be told by eminent lawyers that I am completely and utterly wrong and that I just have to take it as perfectly valid criticism. There is a tendency for the injured party to think that a statement is defamatory when it is not.
It is difficult for us to provide directors or the company itself with the authority to determine whether to circulate a statement in those circumstances. That is why clause 278(1) provides for a company to apply to the court not to circulate a statement if it feels that the statement is defamatory. We must enhance shareholder engagement. The hon. Gentleman has raised a difficult issue, but if an individual shareholder wishes to have a statement distributed, the appropriate way of determining whether it is defamatory is through the courts rather than through those who feel defamed.

James Brokenshire: The Minister has raised two points about the amendment. First, the company itself could take the view that something was defamatory; that is a fair point. In the situations under discussion, allegation and counter-allegation would probably prompt a challenge to the statement, which might be about the running of the company and a shareholder’s belief that the directors were being negligent and not fulfilling their duties appropriately. I have some sympathy with the Minister’s argument. For that reason, the amendment was drafted so that it was objective, not subjective. It says, provided that the
“statement is not defamatory of any person”,
not provided that “in the view of the company, the statement is defamatory.” That was the rationale behind drafting the amendment in that way. The Minister raised a fair point, and for the company to assert and rely on that, there would at least need to be the appropriate legal back-up, which in all likelihood would be by way of a legal opinion to justify the claim that a statement was defamatory. By tabling the amendment, I did not seek to ride roughshod over the valid and important perspective that the Minister adopted, nor override a shareholder’s freedom of speech. The point has been considered in the context of the amendment.

Margaret Hodge: If that is the case, the hon. Gentleman’s point is covered by clause 278(1).

James Brokenshire: My second point relates to clause 278(1). The Minister adopts the argument that it would cover the circumstances of a defamatory statement, but I did not read that approach into it. It says that
“the court is satisfied that the rights conferred by section 275 and that section are being abused.”
It does not say that the statement being circulated is incorrect; it says that the section is being abused. That somewhat unclear language prompted me to table the amendments, because in talking about the section being abused, it was not clear to me that the language in clause 278(1) would cover the circumstances under discussion.
Clause 275, which the subsection specifically refers to, provides for the requirement to circulate a written resolution. I think that the provision is getting at the idea that the statement might be frivolous or an abuse of the process—in other words, that a shareholder might merely use it as a method of being abusive to the company directors.
I entirely understand how clause 278(1) is intended to cover a vexatious use of the provision, but I am concerned that such usage could be perfectly valid in relation to clause 275. A shareholder might have a legitimate complaint about the company’s operations, and therefore a legitimate right to require the circulation of a written resolution, but in the statement that is adopted with it, they overstate their case in some way and it becomes defamatory, injurious or capableof causing some other loss. The amendments were tabled because of my uncertainty as to the ambit of clause 278(1) by virtue of the reference to:
“the rights conferred by section 275 and that section are being abused.”
There is a question of whether they are being abused here.

Margaret Hodge: I think we are slightly dancing on the head of a pin. I accept that this is in relation to the resolution not the statement, but clause 275 states:
“Any resolution may properly be moved as a written resolution unless... it is defamatory of any person, or... it is frivolous or vexatious.”
I genuinely believe that we have covered the point, in how we articulate it in clause 275, in how we set it out in clause 276 and in how we give the power in clause 278 to go to the courts.

James Brokenshire: Perhaps it is the caveat on that issue which causes me the problem—it refers only to the written resolution. Perhaps the Minister will reflect on that point and on the fact that the extension is not also applied to the statement itself. I do not think that that is the intention. I take on board what the Minister has said. It is one of those legal points that we need to get right. That is what the Committee is here to do.
If the Minister would reflect on that issue in the context of the statement and give it some further consideration that would address my concerns. I do not know whether she is prepared to do that. She rightly pointed out the distinction between the written resolution and the statement that goes alongside it. That is the point at issue. I would be prepared to seek the Committee’s leave to withdraw the amendment in those circumstances.

Margaret Hodge: I am a really willing person. I genuinely think on this one that there is not a point to be pursued; otherwise I would pursue it. The hon. Gentleman has not convinced me this morning. I think that we have covered the point. I am conscious of not wanting to overburden myself and my officials, but if he wishes to write to me I undertake to look at the matter seriously.

James Brokenshire: In light of the Minister’s undertaking, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 275 ordered to stand part of the Bill.

Clause 276 ordered to stand part of the Bill.

Clause 277

Expenses of circulation

James Brokenshire: I beg to move amendment No. 337, in clause 277, page 127, line 36, at end add
‘as certified by the company's auditors from time to time.'.

John Bercow: With this it will be convenient to discuss the following amendments: No. 240, in clause 299, page 134, line 44, leave out ‘public'.
No. 241, in clause 299, page 135, line 4, leave out ‘in complying' and insert
‘incurred in printing and distributing a statement so as to comply'.
No. 242, in clause 299, page 135, line 7, leave out paragraph (b).

James Brokenshire: The clause relates to the cost of circulating a written resolution requisitioned by shareholders. A company is not bound to comply unless there is deposited or tendered a sum reasonably sufficient to meet its expenses in so doing. Protection for shareholders is therefore provided in respect of this issue. What is the cost likely to be? The company appears to have an upper hand in negotiation. It is not bound to comply unless it has received the requisite sum. The amendment seeks to ensure that there is some sort of audit protection of the amount. The company should not be able to abuse its position by stating that it needs a certain sum to comply with the relevant requirements and in so doing prevents the shareholders from exercising their rights.
There is a slightly different approach with regard to the members’ statements at the annual general meeting in clause 299.

It being twenty-five minutes past Ten o’clock,The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at One o’clock.